The rupee continued its weakness on Wednesday even as it closed at a fresh six-month low of 65.71 to the dollar led by frenzied dollar-buying by importers amidst negligible sale of the greenback by exporters and sell-off in the equity markets. The currency fell as low as 65.76 during Wednesday’s trade and ended the day 26 paise down. Rupee has been continuously falling over the last five sessions and has lost over 2% of its value during this period. MV Srinivasan, vice-president at Mecklai Financial Services said there is a one-sided market with a lot of dollar-buying. “In the morning itself, we saw massive dollar-buying by importers as a lot of their exposures are still unhedged. On the other hand, exporters are not willing to cash-out their greenbacks as they believe the Rupee will fall further,” Srinivasan indicated.
Another factor contributing to the decline in Rupee is the strengthening of the dollar led by US rate hike expectations gathering momentum. On Tuesday, Fed chair Janet Yellen indicated that it would be imprudent to keep the rates on hold till the inflation hit 2%. This reaffirmed the market’s view that a rate hike is imminent in December. The dollar index was trading strong at 93.42 as on Wednesday evening. Apart from the general strength of the dollar, a sell-off in the domestic equity markets has also added to the woes of the currency. FPIs sold $130 million on Wednesday according to provisional data with the net outflow amounting to $1.16 billion in September so far. “Considering the current momentum of the fall, I will not be surprised if the Rupee breaches the 66 level by next week. However, we will have to closely watch RBI’s actions in the markets,” Srinivasan added.
Interestingly, it seems the central bank’s intervention in the currency market has been subdued over the last few days. As MS Gopikrishnan, head of FXRC trading, South Asia at Standard Chartered Bank points out, the RBI should be reasonably okay with this fall in the Rupee. “There has been lot of noise on Rupee being overvalued and the currency going against exporters. Since the currency’s downward movement has been very sharp, there could be a possibility that it could go into panic situation. That should be prevented. I think the Rupee should settle in the range of 65.25 to 66.25,” Gopikrishnan said.
Rupee’s downward movement began a few days back when the US Fed hinted at a rate hike in December and decided to trim its balancesheet beginning October. The fall accentuated when reports indicated the government might bring in a R40,000 crore stimulus pacakage which the markets feared might widen the fiscal deficit. Since the downward trend began, Rupee’s year-to-date (YTD) return has dropped considerably. The currency has provided a return of 3.37% while some of its emerging market peers have turned out to be better performers. The Chinese Renminbi has given a YTD return of 4.57%, the South African Rand has provided a return of 1.39% while the Indonesian Rupiah’s return stands at 0.21%. The Russian Ruble has provided a return of 5.88% while the Malaysian Ringitt has given a return of 6.27%.